# How to Calculate Sales Tax on Leased Vehicles

by Scott Damon

The process of leasing a car is a little different than a straight car purchase. For instance, when a car is purchased, the sales tax is simply added to the cost of the car and then either paid by the consumer or rolled into a loan. When a car is leased the dealership will remain the title holder for the term of the lease, so the contract terminology and the way the lease payments and sales tax are calculated are also slightly different.

Determine the depreciated value of the car. Because you are only leasing and not purchasing the car, your monthly payments will essentially cover the depreciated value of the car when you turn it in. A lease payment is determined by subtracting the MSRP or negotiated price, minus the residual value. The car dealership will provide you with the residual value. For instance, if you want to lease a car that costs \$30,000 for three years, it may have a residual value of \$15,000 at the end of the lease term.

Ask about the money factor. The money factor is essentially the interest that the car dealership will charge you while using their car during the lease period. The money factor is usually expressed by thousandths. To equate the money factor to an interest rate, you must multiply by 2,400. (2,400 is the industry standard.) So, continuing the example above, say the car dealership was offering a money factor of .003 for the \$30,000 car that you want to lease. Converted to an interest rate, that would equal 7.2 percent. The dealership will always provide the money factor. 2,400 x .003 = 7.2

Subtract the residual value from the negotiated price and divide by the lease term. Using our example, the math woould be: \$30,000 - \$15,000 = \$15,000 Then divided by the lease term of 36 months: \$15,000 / 36 = \$416.67 However, this is not your total payment because the money factor or interest must be added to each payment.

Add the negotiated price of the car to the residual value and then multiply by the money factor. It may seem counter-intuitive, but when calculating a lease payment, the price and residual value are actually added together. Using the above example of a \$30,000 car with a \$15,000 residual value, the answer would be \$45,000. \$30,000 + 15,000 = \$45,000 Then multiplying that number by the money factor: \$45,000 x .003 = 135

Add the interest to the base payment. Using the above example, the math would read: \$135 + \$416.67 = \$551.67 This would be the lease payment before taxes.

Add the tax payment to the lease payment. The sales tax for car-lease payments is based on the sales tax of the state where the car is leased at the time of the lease. (This protects people who lease from having a spike in how much they owe if state sales taxes are increased.) The sales tax varies by state. But using the above example, say the sales tax was 8 percent. The math would be the following: Lease Payment Before Taxes x (1 + State Sales Tax) The "1" represents 100 percent of the payment \$551.67 x 1.08 = \$595.80 This would be the payment with sales taxes included, meaning that \$44.13 per month was sales tax for this particular payment.